U.S. Bancorp reported record net income for the second quarter of 2004 of $1,036.9 million, up 12.7% from the second quarter of 2003. Net interest income was relatively flat compared to the prior year quarter, as growth in earning assets was offset by a lower net interest margin. Noninterest income declined 15.7% from a year ago due to lower securities gains, though fee income grew. Credit quality continued to improve with lower net charge-offs and a decline in nonperforming assets.
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U.S. Bancorp Reports Record Q2 2004 Earnings
1. News Release
Contact:
Steve Dale H.D. McCullough Judith T. Murphy
Media Relations Investor Relations Investor Relations
(612) 303-0784 (612) 303-0786 (612) 303-0783
U.S. BANCORP REPORTS RECORD NET INCOME FOR THE
SECOND QUARTER 2004
Table 1
EARNINGS SUMMARY
($ in millions, except per-share data) Percent Percent
Change Change
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD Percent
2004 2004 2003 1Q04 2Q03 2004 2003 Change
Income from continuing operations, net $1,036.9 $1,008.4 $915.0 2.8 13.3 $2,045.3 $1,799.1 13.7
Net income 1,036.9 1,008.4 919.9 2.8 12.7 2,045.3 1,804.7 13.3
Earnings per share from continuing operations (diluted) 0.54 0.52 0.47 3.8 14.9 1.06 0.93 14.0
Earnings per share (diluted) 0.54 0.52 0.48 3.8 12.5 1.06 0.94 12.8
Return on average assets (%) 2.19 2.14 1.97 2.16 1.96
Return on average equity(%) 21.9 20.7 19.0 21.3 19.0
Efficiency ratio (%) 38.6 47.0 50.6 42.7 49.5
Dividends declared per share $0.24 $0.24 $0.205 -- 17.1 $0.48 $0.41 17.1
Book value per share (period-end) 9.91 10.23 10.14 (3.1) (2.3)
Net interest margin (%) 4.28 4.29 4.52 4.28 4.56
MINNEAPOLIS, July 20, 2004 – U.S. Bancorp (NYSE: USB) today reported net income of
$1,036.9 million for the second quarter of 2004, compared with $919.9 million for the second
quarter of 2003. Net income of $.54 per diluted share in the second quarter of 2004 was higher
than the same period of 2003 by $.06 (12.5 percent). Return on average assets and return on
average equity were 2.19 percent and 21.9 percent, respectively, for the second quarter of 2004,
compared with returns of 1.97 percent and 19.0 percent, respectively, for the second quarter of
2003.
U.S. Bancorp Chairman, President and Chief Executive Officer Jerry A. Grundhofer said,
“Our second quarter results represent the high-quality earnings that we are committed to produce
for our shareholders. We saw very strong growth in our fee-based products and services, with the
majority of categories displaying double-digit growth over both the previous year and the first
quarter of 2004 on an annualized basis. The net interest margin was stable and earning assets were
flat, compared with the first quarter of 2004, as loan growth was funded through reductions in
2. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 2
investment securities. Credit quality continues to show improvement, with the net charge-off ratio
reaching 0.68 percent in the quarter and nonperforming assets declining 13.0 percent from March
31, 2004. In keeping with our target of returning 80 percent or more of earnings to our
shareholders, we paid out 97 percent of earnings during the second quarter in the form of dividends
and share repurchases. The products and services we now offer our customers are among the best
in the industry and, along with our people and growing markets, are exactly what we need to drive
organic growth.”
The Company’s results for the second quarter of 2004 improved over the same period of 2003,
primarily due to growth in fee-based products and services and a lower provision for credit losses.
Included in the current quarter were losses on the sale of securities of ($171.7) million, a net
reduction of $384.8 million from securities gains realized in the second quarter of 2003. The
current quarter also included a $171.1 million reparation of mortgage servicing rights (“MSR”), a
$367.4 million favorable variance over the second quarter of 2003. Since the end of the first
quarter of 2004, the yield on 10-year Treasury Notes increased 75 basis points to 4.58 percent. The
yield on 30-year Fannie Mae commitments rose 70 basis points during the same timeframe.
Driven by the rise in longer-term interest rates, the mortgage industry experienced a decline in
refinancing activities, resulting in lower prepayments.
Total net revenue on a taxable-equivalent basis for the second quarter of 2004 was $250.4
million (7.7 percent) lower than the second quarter of 2003, primarily reflecting the $384.8 million
net reduction in gains (losses) on the sale of securities. Favorable revenue growth in all fee-based
products and services categories partially offset the reduction in securities gains.
Total noninterest expense in the second quarter of 2004 was lower than the second quarter of
2003, primarily reflecting the $367.4 million favorable change in the valuation of mortgage
servicing rights caused by rising interest rates from late first quarter 2004. Also contributing to the
positive variance in expense year-over-year was a $10.8 million reduction in merger and
restructuring-related charges. These positive variances were partially offset by higher incentive-
based compensation, employee benefits, insurance, and other operating expense.
Provision for credit losses for the second quarter of 2004 was $204.5 million, a decrease of
$118.5 million (36.7 percent) from the second quarter of 2003. Net charge-offs in the second
quarter of 2004 were $204.5 million, compared with the first quarter of 2004 net charge-offs of
$233.9 million and the second quarter of 2003 net charge-offs of $322.9 million. The decline in
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3. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 3
losses from a year ago was primarily the result of an improving credit risk profile and collection
efforts. Total nonperforming assets declined to $910.9 million at June 30, 2004, from $1,046.6
million at March 31, 2004 (13.0 percent), and $1,359.7 million at June 30, 2003 (33.0 percent).
The ratio of the allowance for credit losses to nonperforming loans was 299 percent at June 30,
2004, compared with 258 percent at March 31, 2004, and 194 percent at June 30, 2003.
On December 31, 2003, the Company completed the spin-off of Piper Jaffray Companies
(NYSE: PJC). In connection with the spin-off, accounting rules require that the financial
statements be restated for all prior periods. As such, historical financial results related to Piper
Jaffray Companies have been segregated and accounted for in the Company’s financial statements
as discontinued operations. Net income in the second quarter of 2003 included after-tax income
from the discontinued operations of Piper Jaffray Companies of $4.9 million, or $.01 per diluted
share.
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4. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 4
Table 2
INCOME STATEMENT HIGHLIGHTS
(Taxable-equivalent basis, $ in millions, Percent Percent
except per-share data) Change Change
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD Percent
2004 2004 2003 1Q04 2Q03 2004 2003 Change
Net interest income $1,779.4 $1,779.0 $1,798.6 -- (1.1) $3,558.4 $3,575.3 (0.5)
Noninterest income 1,241.7 1,318.3 1,472.9 (5.8) (15.7) 2,560.0 2,839.0 (9.8)
Total net revenue 3,021.1 3,097.3 3,271.5 (2.5) (7.7) 6,118.4 6,414.3 (4.6)
Noninterest expense 1,232.6 1,454.9 1,546.6 (15.3) (20.3) 2,687.5 3,001.2 (10.5)
Provision for credit losses 204.5 235.0 323.0 (13.0) (36.7) 439.5 658.0 (33.2)
Income from continuing operations before income taxes 1,584.0 1,407.4 1,401.9 12.5 13.0 2,991.4 2,755.1 8.6
Taxable-equivalent adjustment 7.0 7.2 6.7 (2.8) 4.5 14.2 14.0 1.4
Applicable income taxes 540.1 391.8 480.2 37.9 12.5 931.9 942.0 (1.1)
Income from continuing operations 1,036.9 1,008.4 915.0 2.8 13.3 2,045.3 1,799.1 13.7
Income from discontinued operations (after-tax) -- -- 4.9 nm nm -- 5.6 nm
Net income $1,036.9 $1,008.4 $919.9 2.8 12.7 $2,045.3 $1,804.7 13.3
Diluted earnings per share:
Income from continuing operations $0.54 $0.52 $0.47 3.8 14.9 $1.06 $0.93 14.0
Discontinued operations -- -- 0.01 nm nm -- 0.01 nm
Net income $0.54 $0.52 $0.48 3.8 12.5 $1.06 $0.94 12.8
Net Interest Income
Second quarter net interest income on a taxable-equivalent basis was $1,779.4 million,
compared with $1,798.6 million recorded in the second quarter of 2003. Average earning assets
for the period increased over the second quarter of 2003 by $7.6 billion (4.7 percent), primarily
driven by increases in investment securities, residential mortgages, and retail loans, partially offset
by a decline in commercial loans and loans held for sale related to mortgage banking activities.
The net interest margin in the second quarter of 2004 was 4.28 percent, compared with 4.29
percent in the first quarter of 2004 and 4.52 percent in the second quarter of 2003. The decline in
the net interest margin in the second quarter of 2004 from the second quarter of 2003 primarily
reflected growth in lower-yielding investment securities as a percent of total earning assets, a
change in loan mix, and a decline in the margin benefit from net free funds due to lower interest
rates. In addition, the net interest margin declined year-over-year as a result of consolidating high
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5. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 5
credit quality, low margin loans from Stellar Funding Group, Inc., a commercial loan conduit, onto
the Company’s balance sheet during the third quarter of 2003.
NET INTEREST INCOME Table 3
(Taxable-equivalent basis; $ in millions)
Change Change
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD
2004 2004 2003 1Q04 2Q03 2004 2003 Change
Components of net interest income
Income on earning assets $2,243.2 $2,265.3 $2,334.5 $ (22.1) $ (91.3) $4,508.5 $4,673.0 $ (164.5)
Expense on interest-bearing liabilities 463.8 486.3 535.9 (22.5) (72.1) 950.1 1,097.7 (147.6)
Net interest income $1,779.4 $1,779.0 $1,798.6 $ 0.4 $ (19.2) $3,558.4 $3,575.3 $ (16.9)
Average yields and rates paid
Earning assets yield 5.39 % 5.47 % 5.87 % (0.08) % (0.48) % 5.43 % 5.96 % (0.53) %
Rate paid on interest-bearing liabilities 1.38 1.45 1.68 (0.07) (0.30) 1.42 1.75 (0.33)
Gross interest margin 4.01 % 4.02 % 4.19 % (0.01) % (0.18) % 4.01 % 4.21 % (0.20) %
Net interest margin 4.28 % 4.29 % 4.52 % (0.01) % (0.24) % 4.28 % 4.56 % (0.28) %
Average balances
Investment securities $42,489 $44,744 $36,142 $(2,255) $6,347 $43,617 $35,187 $8,430
Loans 121,161 118,810 117,803 2,351 3,358 119,985 117,061 2,924
Earning assets 166,990 166,359 159,425 631 7,565 166,674 157,784 8,890
Interest-bearing liabilities 134,819 134,966 127,552 (147) 7,267 134,893 126,119 8,774
Net free funds* 32,171 31,393 31,873 778 298 31,781 31,665 116
* Represents noninterest-bearing deposits, allowance for loan losses, unrealized gain (loss)
on available-for-sale securities, non-earning assets, other noninterest-bearing liabilities and equity
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6. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 6
Table 4
AVERAGE LOANS
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD Percent
2004 2004 2003 1Q04 2Q03 2004 2003 Change
Commercial $34,484 $33,629 $36,581 2.5 (5.7) $34,057 $36,460 (6.6)
Lease financing 4,846 4,902 5,121 (1.1) (5.4) 4,873 5,186 (6.0)
Total commercial 39,330 38,531 41,702 2.1 (5.7) 38,930 41,646 (6.5)
Commercial mortgages 20,477 20,554 20,105 (0.4) 1.9 20,515 20,173 1.7
Construction and development 6,639 6,556 6,984 1.3 (4.9) 6,598 6,764 (2.5)
Total commercial real estate 27,116 27,110 27,089 -- 0.1 27,113 26,937 0.7
Residential mortgages 14,052 13,610 11,012 3.2 27.6 13,831 10,570 30.9
Credit card 5,989 5,878 5,388 1.9 11.2 5,933 5,389 10.1
Retail leasing 6,484 6,192 5,762 4.7 12.5 6,338 5,756 10.1
Home equity and second mortgages 13,775 13,376 13,316 3.0 3.4 13,575 13,392 1.4
Other retail 14,415 14,113 13,534 2.1 6.5 14,265 13,371 6.7
Total retail 40,663 39,559 38,000 2.8 7.0 40,111 37,908 5.8
Total loans $121,161 $118,810 $117,803 2.0 2.9 $119,985 $117,061 2.5
Average loans for the second quarter of 2004 were $3.4 billion (2.9 percent) higher than the
second quarter of 2003, primarily due to growth in average residential mortgages of $3.0 billion
(27.6 percent) and retail loans of $2.7 billion (7.0 percent) year-over-year. Total commercial loans
declined by $2.4 billion (5.7 percent), while total commercial real estate loans increased by $27
million (.1 percent). Although the consolidation of loans from the Stellar commercial loan conduit
had a positive impact on average loan balances year-over-year, soft economic conditions
throughout much of 2003 led to the overall decrease in total commercial loans. Average loans for
the second quarter of 2004 were higher than the first quarter of 2004 by $2.4 billion (2.0 percent),
reflecting growth in commercial loans, residential mortgages and retail loans.
Average investment securities in the second quarter of 2004 were $6.3 billion (17.6 percent)
higher than the second quarter of 2003, reflecting the reinvestment of proceeds from declining
commercial loan balances and deposit growth from a year ago. Investment securities at June 30,
2004, were $4.7 billion higher than at June 30, 2003, but $5.1 billion lower than the balance at
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7. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 7
March 31, 2004. During the second quarter of 2004, the Company continued to reposition its
investment portfolio as part of its asset/liability management activities by acquiring principally
floating and shorter-term fixed-rate securities and selling fixed-rate mortgage-backed securities.
Table 5
AVERAGE DEPOSITS
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD Percent
2004 2004 2003 1Q04 2Q03 2004 2003 Change
Noninterest-bearing deposits $30,607 $29,025 $32,515 5.5 (5.9) $29,815 $32,669 (8.7)
Interest-bearing deposits
Interest checking 20,739 20,948 18,090 (1.0) 14.6 20,844 17,814 17.0
Money market accounts 34,242 34,397 31,134 (0.5) 10.0 34,320 29,915 14.7
Savings accounts 5,936 5,898 5,614 0.6 5.7 5,917 5,444 8.7
Savings products 60,917 61,243 54,838 (0.5) 11.1 61,081 53,173 14.9
Time certificates of deposit less
than $100,000 13,021 13,618 15,790 (4.4) (17.5) 13,319 16,500 (19.3)
Time deposits greater than $100,000 12,571 12,133 13,008 3.6 (3.4) 12,352 13,642 (9.5)
Total interest-bearing deposits 86,509 86,994 83,636 (0.6) 3.4 86,752 83,315 4.1
Total deposits $117,116 $116,019 $116,151 0.9 0.8 $116,567 $115,984 0.5
Average noninterest-bearing deposits for the second quarter of 2004 were lower than the
second quarter of 2003 by $1.9 billion (5.9 percent). The change was primarily due to lower
deposits associated with mortgage banking activities and a decline in Federal government deposits
related to their decision in the third quarter of 2003 to pay for treasury management services rather
than maintain compensating balances. Average interest-bearing deposits increased by $2.9 billion
(3.4 percent) over the second quarter of 2003, driven by increases in savings products balances,
partially offset by decreases in time certificates of deposit less than $100,000 and time deposits
greater than $100,000.
Average noninterest-bearing deposits for the second quarter of 2004 were $1.6 billion (5.5
percent) higher than the first quarter of 2004, primarily reflecting seasonality of corporate and
individual tax filings. Average interest-bearing deposits were slightly lower than the first quarter
of 2004 (.6 percent), primarily due to decreases in savings products and time certificates of deposit
less than $100,000, partially offset by an increase in time deposits greater than $100,000.
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8. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 8
Noninterest-bearing deposits at June 30, 2004, were lower than at June 30, 2003, by $11.7 billion
(26.3 percent), but were $1.7 billion (5.5 percent) higher than at March 31, 2004.
Table 6
NONINTEREST INCOME
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD Percent
2004 2004 2003 1Q04 2Q03 2004 2003 Change
Credit and debit card revenue $158.8 $141.8 $142.3 12.0 11.6 $300.6 $269.7 11.5
Corporate payment products revenue 102.7 94.8 90.9 8.3 13.0 197.5 176.9 11.6
ATM processing services 44.9 42.2 41.9 6.4 7.2 87.1 84.3 3.3
Merchant processing services 165.1 141.1 141.8 17.0 16.4 306.2 269.1 13.8
Trust and investment management fees 251.7 248.6 238.9 1.2 5.4 500.3 467.5 7.0
Deposit service charges 202.1 185.2 179.0 9.1 12.9 387.3 342.2 13.2
Treasury management fees 121.5 117.5 111.8 3.4 8.7 239.0 223.8 6.8
Commercial products revenue 107.4 110.4 100.0 (2.7) 7.4 217.8 204.2 6.7
Mortgage banking revenue 109.9 94.2 90.3 16.7 21.7 204.1 185.7 9.9
Investment products fees and commissions 42.2 39.3 38.1 7.4 10.8 81.5 73.2 11.3
Securities gains (losses), net (171.7) -- 213.1 nm nm (171.7) 353.8 nm
Other 107.1 103.2 84.8 3.8 26.3 210.3 188.6 11.5
Total noninterest income $1,241.7 $1,318.3 $1,472.9 (5.8) (15.7) $2,560.0 $2,839.0 (9.8)
Noninterest Income
Second quarter noninterest income was $1,241.7 million, a decrease of $231.2 million (15.7
percent) from the same quarter of 2003, and a $76.6 million (5.8 percent) decrease from the first
quarter of 2004. The decline in noninterest income from the second quarter of 2003 was driven by
a net reduction in gains (losses) on the sale of securities of $384.8 million. The net reduction in
gains (losses) on the sales of securities year-over-year was partially offset by increases in all other
categories of noninterest income. Credit and debit card revenue and corporate payment products
revenue were higher in the second quarter of 2004 than the second quarter of 2003 by $16.5
million (11.6 percent) and $11.8 million (13.0 percent), respectively. Although credit and debit
card revenue grew year-over-year, the growth was somewhat muted due to the impact of the
settlement of the antitrust litigation brought against VISA USA and Mastercard by Wal-Mart
Stores, Inc., Sears Roebuck & Co. and other retailers, which lowered the interchange rate on
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9. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 9
signature debit transactions beginning in August 2003. The year-over-year impact of the VISA
settlement on credit and debit card revenue was approximately $7.4 million. This change in the
interchange rate, in addition to higher customer loyalty rewards expenses, however, were more
than offset by increases in transaction volumes and other rate adjustments. The corporate payment
products revenue growth reflected growth in sales and card usage. Merchant processing services
revenue was higher in the second quarter of 2004 than the same quarter of 2003 by $23.3 million
(16.4 percent), reflecting an increase in transaction volume and the purchase of two European
merchant acquiring businesses, which accounted for approximately $7.1 million of the increase.
The favorable variance in trust and investment management fees of $12.8 million (5.4 percent) in
the second quarter of 2004 over the same period of 2003 was principally driven by higher equity
market valuations year-over-year, as well as net new account growth. Deposit service charges
were higher year-over-year by $23.1 million (12.9 percent) due to account growth and revenue
enhancement initiatives. Treasury management fees grew by $9.7 million (8.7 percent) in the
second quarter of 2004 over the same period of 2003. The increase in treasury management fees
year-over-year was partially driven by a change during the third quarter of 2003 in the Federal
government’s payment methodology for treasury management services from compensating
balances, reflected in net interest income, to fees. Commercial products revenue increased by $7.4
million (7.4 percent) over the second quarter of 2003, primarily due to leasing fees and
international product revenue. The favorable variance year-over-year in mortgage banking revenue
of $19.6 million (21.7 percent) was primarily due to higher origination and sales and loan servicing
revenue. The $4.1 million (10.8 percent) increase in investment products fees and commissions
reflected higher sales activity in the Consumer Banking business line. Other income was higher
year-over-year by $22.3 million (26.3 percent), primarily due to higher income from equity
investments relative to the same quarter of 2003.
Noninterest income was lower in the second quarter of 2004 than the first quarter of 2004 by
$76.6 million (5.8 percent), primarily due to the net reduction in gains (losses) on the sale of
securities of $171.7 million. This unfavorable variance was partially offset by growth in the
majority of other noninterest income categories. Credit and debit card revenue, corporate payment
products revenue and ATM processing services increased quarter-over-quarter by $17.0 million
(12.0 percent), $7.9 million (8.3 percent) and $2.7 million (6.4 percent), respectively, driven by
seasonally higher transaction volumes. Merchant processing services revenue rose by $24.0
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10. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 10
million (17.0 percent) over the first quarter of 2004 due to seasonality, higher same store sales and
the purchase of two European merchant acquiring businesses. Trust and investment management
fees were higher in the second quarter of 2004 than the first quarter of 2004 by $3.1 million (1.2
percent) due to tax preparation fees and net new account growth. Deposit service charges were
higher in the second quarter by $16.9 million (9.1 percent) than the first quarter, primarily due to
pricing enhancements and an increase in transaction-related fees. Treasury management fees
increased by $4.0 million (3.4 percent) quarter-over-quarter, primarily due to federal tax receipts
processing. Mortgage banking revenue was higher in the second quarter of 2004 than the first
quarter of 2004 by $15.7 million (16.7 percent) due to increased origination and sales and loan
servicing revenue. Investment products fees and commissions and other income increased by $2.9
million (7.4 percent) and $3.9 million (3.8 percent), respectively. Higher investment product sales
in Consumer Banking led to the improvement in investment products fees and commissions, while
higher revenue from equity investments relative to the first quarter of 2004 was the primary reason
for the favorable variance in other income.
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11. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 11
Table 7
NONINTEREST EXPENSE
($ in millions) Percent Percent
Change Change
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD Percent
2004 2004 2003 1Q04 2Q03 2004 2003 Change
Compensation $572.6 $535.8 $547.6 6.9 4.6 $1,108.4 $1,093.6 1.4
Employee benefits 91.2 100.2 79.6 (9.0) 14.6 191.4 171.3 11.7
Net occupancy and equipment 153.4 155.7 159.5 (1.5) (3.8) 309.1 320.8 (3.6)
Professional services 34.7 32.4 32.9 7.1 5.5 67.1 59.3 13.2
Marketing and business development 48.7 35.3 51.1 38.0 (4.7) 84.0 80.9 3.8
Technology and communications 102.4 101.7 104.1 0.7 (1.6) 204.1 209.0 (2.3)
Postage, printing and supplies 60.5 61.6 61.8 (1.8) (2.1) 122.1 122.2 (0.1)
Other intangibles (47.6) 226.1 312.3 nm nm 178.5 547.4 (67.4)
Merger and restructuring-related charges -- -- 10.8 nm nm -- 28.4 nm
Other 216.7 206.1 186.9 5.1 15.9 422.8 368.3 14.8
Total noninterest expense $1,232.6 $1,454.9 $1,546.6 (15.3) (20.3) $2,687.5 $3,001.2 (10.5)
Noninterest Expense
Second quarter noninterest expense totaled $1,232.6 million, a decrease of $314.0 million (20.3
percent) from the same quarter of 2003 and a $222.3 million (15.3 percent) decrease from the first
quarter of 2004. The decline in expense year-over-year was primarily driven by the favorable
change in MSR intangible valuations of $367.4 million and a $10.8 million reduction in merger
and restructuring-related charges, offset by increases in compensation, employee benefits,
professional services, and other expense. Compensation expense was higher year-over-year due to
an increase in salaries, performance-based incentives and stock-based compensation, offset
somewhat by lower contract labor costs. Employee benefits increased year-over-year by $11.6
million (14.6 percent), primarily as a result of higher pension expense, training, education and
recruitment costs and payroll taxes. Professional services were higher than the same period of
2003 by $1.8 million (5.5 percent), while other expense rose by $29.8 million (15.9 percent),
primarily due to higher charge-back exposure associated with the Company’s airline merchant
processing portfolio, insurance, higher deposit fraud losses and processing expenses associated
with the growth in payment services revenue.
Noninterest expense in the second quarter of 2004 was lower than the first quarter of 2004 by
$222.3 million (15.3 percent). The decline in noninterest expense from the first quarter of 2004
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12. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 12
was primarily due to the favorable change in MSR intangible valuations of $280.4 million,
partially offset by increases in compensation, professional services, marketing and business
development, technology and communication and other expense. The $36.8 million (6.9 percent)
increase in compensation expense quarter-over-quarter was primarily due to higher performance-
based incentives, resulting from mortgage banking and product sales production, as well as stock-
based compensation costs. The unfavorable variance in marketing and business development of
$13.4 million (38.0 percent) quarter-over-quarter was primarily due to the timing of promotional
programs and brand advertising. Other expense grew by $10.6 million (5.1 percent) over the first
quarter of 2004, the result of higher merchant acquiring costs, higher mortgage loan expenses and
slightly higher deposit fraud losses, offset by a charge taken in the first quarter of 2004 related to
prepaying a portion of the Company’s debt.
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13. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 13
Table 8
ALLOWANCE FOR CREDIT LOSSES
($ in millions) 2Q 1Q 4Q 3Q 2Q
2004 2004 2003 2003 2003
Balance, beginning of period $2,369.7 $2,368.6 $2,367.7 $2,367.6 $2,408.5
Net charge-offs
Commercial 35.7 53.6 100.9 123.9 122.9
Lease financing 18.9 21.3 14.9 19.2 26.9
Total commercial 54.6 74.9 115.8 143.1 149.8
Commercial mortgages 1.8 4.6 10.0 5.9 9.3
Construction and development 0.7 4.7 2.9 4.6 2.5
Total commercial real estate 2.5 9.3 12.9 10.5 11.8
Residential mortgages 7.3 7.3 7.2 7.3 6.5
Credit card 62.7 63.4 62.3 59.3 64.5
Retail leasing 9.8 11.0 11.3 12.2 12.6
Home equity and second mortgages 20.2 19.5 20.4 23.2 23.9
Other retail 47.4 48.5 55.2 54.3 53.8
Total retail 140.1 142.4 149.2 149.0 154.8
Total net charge-offs 204.5 233.9 285.1 309.9 322.9
Provision for credit losses 204.5 235.0 286.0 310.0 323.0
Acquisitions and other changes -- -- -- -- (41.0)
Balance, end of period $2,369.7 $2,369.7 $2,368.6 $2,367.7 $2,367.6
Components
Allowance for loan losses $2,244.4 $2,238.3 $2,235.0 $2,241.2 $2,266.2
Liability for unfunded credit commitments* 125.3 131.4 133.6 126.5 101.4
Total allowance for credit losses $2,369.7 $2,369.7 $2,368.6 $2,367.7 $2,367.6
Gross charge-offs $274.3 $304.8 $352.3 $373.6 $375.6
Gross recoveries $69.8 $70.9 $67.2 $63.7 $52.7
Net charge-offs to average loans (%) 0.68 0.79 0.95 1.02 1.10
Allowance as a percentage of:
Period-end loans 1.93 1.98 2.00 1.98 1.98
Nonperforming loans 299 258 232 202 194
Nonperforming assets 260 226 206 180 174
* During the first quarter of 2004, the Company reclassified the portion of its allowance for credit losses
related to commercial off-balance sheet loan commitments and letters of credit to a separate liability account.
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14. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 14
Credit Quality
The allowance for credit losses was $2,369.7 million at June 30, 2004, equal to the allowance
for credit losses at March 31, 2004, and essentially equal to the allowance for credit losses of
$2,367.6 million at June 30, 2003. The ratio of the allowance for credit losses to period-end loans
was 1.93 percent at June 30, 2004, compared with 1.98 percent at both March 31, 2004, and June
30, 2003. The ratio of the allowance for credit losses to nonperforming loans was 299 percent at
June 30, 2004, compared with 258 percent at March 31, 2004, and 194 percent at June 30, 2003.
Total net charge-offs in the second quarter of 2004 were $204.5 million, compared with the first
quarter of 2004 net charge-offs of $233.9 million and the second quarter of 2003 net charge-offs of
$322.9 million.
Commercial and commercial real estate loan net charge-offs were $57.1 million for the second
quarter of 2004, or .35 percent of average loans outstanding, compared with $84.2 million, or .52
percent of average loans outstanding, in the first quarter of 2004 and $161.6 million, or .94 percent
of average loans outstanding, in the second quarter of 2003. The decline in net charge-offs
continues to be broad-based across most industries within the commercial loan portfolio.
Retail loan net charge-offs of $140.1 million in the second quarter of 2004 were $2.3 million
(1.6 percent) lower than the first quarter of 2004 and $14.7 million (9.5 percent) lower than the
second quarter of 2003. Retail loan net charge-offs as a percent of average loans outstanding were
1.39 percent in the second quarter of 2004, compared with 1.45 percent and 1.63 percent in the first
quarter of 2004 and second quarter of 2003, respectively. Lower levels of retail loan net charge-
offs principally reflected the Company’s improvement in ongoing collection efforts and risk
management.
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15. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 15
Table 9
CREDIT RATIOS
(Percent) 2Q 1Q 4Q 3Q 2Q
2004 2004 2003 2003 2003
Net charge-offs ratios*
0.42 0.64 1.14 1.33 1.35
Commercial
1.57 1.75 1.19 1.52 2.11
Lease financing
0.56 0.78 1.15 1.35 1.44
Total commercial
0.04 0.09 0.20 0.12 0.19
Commercial mortgages
0.04 0.29 0.16 0.25 0.14
Construction and development
0.04 0.14 0.19 0.15 0.17
Total commercial real estate
0.21 0.22 0.21 0.24 0.24
Residential mortgages
4.21 4.34 4.33 4.20 4.80
Credit card
0.61 0.71 0.76 0.83 0.88
Retail leasing
0.59 0.59 0.62 0.70 0.72
Home equity and second mortgages
1.32 1.38 1.57 1.55 1.59
Other retail
1.39 1.45 1.53 1.54 1.63
Total retail
0.68 0.79 0.95 1.02 1.10
Total net charge-offs
Delinquent loan ratios - 90 days or more past due excluding nonperforming loans**
0.05 0.06 0.06 0.11 0.09
Commercial
0.01 0.01 0.02 0.01 0.02
Commercial real estate
0.50 0.56 0.61 0.63 0.65
Residential mortgages
0.48 0.54 0.56 0.57 0.63
Retail
0.24 0.27 0.28 0.29 0.30
Total loans
Delinquent loan ratios - 90 days or more past due including nonperforming loans**
1.37 1.67 1.97 2.31 2.27
Commercial
0.76 0.85 0.82 0.75 0.82
Commercial real estate
0.79 0.87 0.91 0.98 1.13
Residential mortgages
0.52 0.59 0.62 0.63 0.70
Retail
0.88 1.03 1.14 1.27 1.32
Total loans
* annualized and calculated on average loan balances
** ratios are expressed as a percent of ending loan balances
The overall level of net charge-offs in the second quarter of 2004 reflected the Company’s
ongoing efforts to reduce the overall risk profile of the organization. Net charge-offs are expected
to continue to trend modestly lower.
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16. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 16
Table 10
ASSET QUALITY
($ in millions)
Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2004 2004 2003 2003 2003
Nonperforming loans
Commercial $415.7 $510.7 $623.5 $793.9 $795.2
Lease financing 111.0 115.6 113.3 111.6 126.6
Total commercial 526.7 626.3 736.8 905.5 921.8
Commercial mortgages 163.8 184.9 177.6 161.5 182.0
Construction and development 41.3 43.6 39.9 40.2 35.3
Commercial real estate 205.1 228.5 217.5 201.7 217.3
Residential mortgages 41.7 42.1 40.5 46.1 56.0
Retail 18.4 20.4 25.2 21.6 24.2
Total nonperforming loans 791.9 917.3 1,020.0 1,174.9 1,219.3
Other real estate 70.0 76.0 72.6 70.4 71.5
Other nonperforming assets 49.0 53.3 55.5 73.0 68.9
Total nonperforming assets* $910.9 $1,046.6 $1,148.1 $1,318.3 $1,359.7
Accruing loans 90 days or more past due $293.2 $319.2 $329.4 $352.4 $360.7
Nonperforming assets to loans
plus ORE (%) 0.74 0.87 0.97 1.10 1.14
*does not include accruing loans 90 days or more past due
Nonperforming assets at June 30, 2004, totaled $910.9 million, compared with $1,046.6
million at March 31, 2004, and $1,359.7 million at June 30, 2003. The ratio of nonperforming
assets to loans and other real estate was .74 percent at June 30, 2004, compared with .87 percent at
March 31, 2004, and 1.14 percent at June 30, 2003. Given the Company’s ongoing efforts to
reduce the overall risk profile of the organization, nonperforming assets are expected to continue to
trend lower.
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17. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 17
Table 11
CAPITAL POSITION
($ in millions) Jun 30 Mar 31 Dec 31 Sep 30 Jun 30
2004 2004 2003 2003 2003
Total shareholders' equity $18,675 $19,452 $19,242 $19,771 $19,521
Tier 1 capital 14,294 14,499 14,623 14,589 13,950
Total risk-based capital 21,255 21,559 21,710 21,859 21,392
Common equity to assets 9.8 % 10.1 % 10.2 % 10.5 % 10.0 %
Tangible common equity to assets 6.3 6.4 6.5 6.6 6.0
Tier 1 capital ratio 8.7 8.9 9.1 9.0 8.5
Total risk-based capital ratio 12.9 13.3 13.6 13.5 13.0
Leverage ratio 7.8 8.0 8.0 8.0 7.8
Total shareholders’ equity was $18.7 billion at June 30, 2004, compared with $19.5 billion
at June 30, 2003. The decrease was the result of corporate earnings offset by dividends, including
the special dividend of $685 million related to the spin-off of Piper Jaffray Companies, share
buybacks and the change in other comprehensive income, principally reflecting changes in
securities valuations from a year ago.
Tangible common equity to assets was 6.3 percent at June 30, 2004, compared with 6.4
percent at March 31, 2004, and 6.0 percent at June 30, 2003. The Tier 1 capital ratio was 8.7
percent at June 30, 2004, compared with 8.9 percent at March 31, 2004, and 8.5 percent at June 30,
2003. The total risk-based capital ratio was 12.9 percent at June 30, 2004, compared with 13.3
percent at March 31, 2004, and 13.0 percent at June 30, 2003. The leverage ratio was 7.8 percent
at June 30, 2004, compared with 8.0 percent at March 31, 2004, and 7.8 percent at June 30, 2003.
All regulatory ratios continue to be in excess of stated “well capitalized” requirements.
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18. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 18
Table 12
COMMON SHARES
(Millions) 2Q 1Q 4Q 3Q 2Q
2004 2004 2003 2003 2003
Beginning shares outstanding 1,901.2 1,922.9 1,927.4 1,924.5 1,919.0
Shares issued for stock option and stock purchase
plans, acquisitions and other corporate purposes 3.7 12.1 10.5 2.9 5.5
Shares repurchased (20.8) (33.8) (15.0) -- --
Ending shares outstanding 1,884.1 1,901.2 1,922.9 1,927.4 1,924.5
On December 16, 2003, the board of directors of U.S. Bancorp approved an authorization
to repurchase 150 million shares of outstanding common stock during the following 24 months.
During the second quarter of 2004, the Company repurchased 20.8 million shares of common
stock. As of June 30, 2004, there were approximately 87 million shares remaining to be
repurchased under the current authorization.
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19. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 19
Table 13
LINE OF BUSINESS FINANCIAL PERFORMANCE*
($ in millions)
Operating Earnings** Percent Change 2Q 2004
2Q 1Q 2Q 2Q04 vs 2Q04 vs YTD YTD Percent Earnings
Business Line 2004 2004 2003 1Q04 2Q03 2004 2003 Change Composition
Wholesale Banking $265.7 $249.9 $210.5 6.3 26.2 $515.6 $423.2 21.8 26 %
Consumer Banking*** 394.5 283.8 333.2 39.0 18.4 678.3 646.4 4.9 38
Private Client, Trust
and Asset Management 109.0 110.0 97.5 (0.9) 11.8 219.0 185.3 18.2 10
Payment Services 176.8 160.9 143.4 9.9 23.3 337.7 276.4 22.2 17
Treasury and Corporate Support 90.9 203.8 137.6 (55.4) (33.9) 294.7 286.5 2.9 9
Consolidated Company $1,036.9 $1,008.4 $922.2 2.8 12.4 $2,045.3 $1,817.8 12.5 100 %
* preliminary data
** earnings before merger and restructuring-related items and discontinued operations
*** In 2Q04 Consumer Banking's retail banking business grew operating earnings by 22.4 percent and 8.8 percent over 2Q03 and 1Q04, respectively.
The Consumer Bank's mortgage banking business profitability declined slightly in 2Q04 from 2Q03, but significantly increased in 2Q04 over
1Q04 due to MSR impairment of $109.3 million, which the Company elected not to offset by realizing securities gains for the business line in 1Q04.
Lines of Business
Within the Company, financial performance is measured by major lines of business which
include Wholesale Banking, Consumer Banking, Private Client, Trust and Asset Management,
Payment Services, and Treasury and Corporate Support. These operating segments are
components of the Company about which financial information is available and is evaluated
regularly in deciding how to allocate resources and assess performance. Designations, assignments
and allocations may change from time to time as management systems are enhanced, methods of
evaluating performance or product lines change or business segments are realigned to better
respond to our diverse customer base. During 2004, certain organization and methodology
changes were made and, accordingly, prior period results have been restated and presented on a
comparable basis.
Wholesale Banking offers lending, depository, treasury management and other financial
services to middle market, large corporate and public sector clients. Wholesale Banking
contributed $265.7 million of the Company’s operating earnings in the second quarter of 2004, a
26.2 percent increase over the same period of 2003 and a 6.3 percent increase over the first quarter
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20. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 20
of 2004. The increase in Wholesale Banking’s second quarter 2004 contribution over the second
quarter of 2003 was primarily the result of favorable variances in the provision for credit losses
(92.3 percent) and total noninterest expense (3.3 percent), partially offset by a decrease in total net
revenue (3.5 percent). Total net revenue in the second quarter of 2004 was lower than in the
second quarter of 2003, reflecting unfavorable variances in both net interest income (4.9 percent)
and noninterest income (.6 percent). The decrease in net interest income was primarily due to a
decline in average total loans outstanding (5.2 percent) and average noninterest bearing deposits
(14.5 percent) due, in part, to lower deposits held by the Federal government. Although treasury
management fees were higher (15.1 percent) year-over-year, the growth was more than offset by
unfavorable variances in commercial products revenue (6.3 percent), primarily conduit servicing
fees, and other revenue (32.7 percent). The increase in treasury management fees was principally
driven by a change during the third quarter of 2003 in the Federal government’s payment
methodology for treasury management services from maintaining compensating deposit balances
to paying fees. Wholesale Banking’s favorable variance in total noninterest expense year-over-
year was primarily driven by a decline in other expense (30.2 percent), the result of lower loan
workout-related expense relative to the second quarter of 2003, partially offset by an increase in
net shared services expense (5.9 percent), which is primarily driven by customer transaction
volume and account activities. The decrease in the provision for credit losses year-over-year was
the result of a reduction in net charge-offs, the result of improving credit quality. The increase in
Wholesale Banking’s contribution to operating earnings in the second quarter of 2004 over the first
quarter of 2004 was the net result of favorable variances in the provision for credit losses (74.7
percent) and total net revenue (.3 percent), partially offset by higher total noninterest expense (1.5
percent). Total net revenue was slightly higher on a linked quarter basis, with a favorable variance
in net interest income (1.1 percent), offset by an unfavorable variance in noninterest income (.8
percent). The change in net interest income reflected increases over the prior quarter in the
business line’s average total loans outstanding (1.0 percent) and average total deposits (2.4
percent). The unfavorable variance quarter-over-quarter in noninterest income was attributed to
lower commercial products revenue, partially offset by higher treasury management fees and other
revenue. The increase in noninterest expense was principally due to higher net shared services and
loan-related expense, offset by lower compensation and employee benefits expense. Lower net
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21. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 21
charge-offs from improving credit quality drove the favorable variance in provision for credit
losses.
Consumer Banking delivers products and services to the broad consumer market and small
businesses through banking offices, telemarketing, on-line services, direct mail and automated
teller machines (“ATMs”). It encompasses community banking, metropolitan banking, branch
ATM banking, small business banking, including lending guaranteed by the Small Business
Administration, small-ticket leasing, consumer lending, mortgage banking, workplace banking,
student banking, 24-hour banking, and investment product and insurance sales. Consumer
Banking contributed $394.5 million of the Company’s operating earnings in the second quarter of
2004, an 18.4 percent increase over the same period of 2003 and a 39.0 percent increase over the
first quarter of 2004. While the retail banking business segment grew operating earnings by 22.4
percent and 8.8 percent over the second quarter of 2003 and the first quarter of 2004, respectively,
the contribution of the mortgage banking business declined slightly year-over-year (3.7 percent),
but provided a significant part of the growth for Consumer Banking over the first quarter of 2004.
The decrease in the mortgage banking business’s contribution from the second quarter of 2003 was
primarily the result of an increase in noninterest expense, excluding the change in MSR valuation,
due to an increase in other intangible amortization, the result of the growing servicing portfolio. In
the second quarter of 2004, as in the second quarter of 2003, net gains (losses) on securities in the
mortgage banking business line were offset by the change in MSR valuation. The mortgage
banking business line’s contribution rose in the second quarter of 2004 over the first quarter of
2004, primarily due to a favorable change in the MSR valuation of $280.4 million, partially offset
by the reduction in net gains (losses) on the sale of securities of $171.1 million. In the first quarter
of 2004, the Company elected not to sell higher yielding securities to offset MSR impairment in
the mortgage banking business. The mortgage banking business also benefited from growth in
both net interest and noninterest income and lower noninterest expense relative to the first quarter
of 2004.
For the Consumer Banking business, as a whole, the unfavorable variance in gains (losses) on
the sale of securities was offset with the favorable variance in MSR valuation year-over-year.
Excluding net gains (losses) on the sale of securities, total net revenue was higher than the same
quarter of the 2003 by 6.2 percent, including increases in both net interest income (1.0 percent) and
noninterest income (18.2 percent). Consumer Banking’s results also benefited from a reduction in
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22. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 22
the provision for credit losses (11.8 percent) and a favorable variance in total noninterest expense,
excluding the change in MSR valuations (.6 percent), over the second quarter of 2003. Net interest
income improved year-over-year, the result of increases in average loans outstanding (8.6 percent)
and a favorable change in the mix of average total deposits, partially offset by declines in the
average balance of loans held for sale and in the business line’s net interest margin. Noninterest
income improved in the second quarter of 2004 over the same period of 2003, primarily due to
growth in deposit service charges (13.1 percent), commercial products revenue (47.9 percent),
mortgage banking revenue (20.9 percent), investment products fees and commissions (11.7
percent) and other revenue (89.0 percent). Other revenue was higher due to lower lease residual
losses and gains on the sale of student loans relative to the second quarter of 2003. Total
noninterest expense, excluding the change in MSR valuation (.6 percent), in the second quarter of
2004 was lower than the second quarter of 2003, mainly due to a favorable change in net shared
services expense (12.4 percent). A reduction in net charge-offs year-over-year drove the positive
variance in the business line’s provision for credit losses.
The increase in Consumer Banking’s contribution in the second quarter of 2004 over the first
quarter of 2004 was primarily the result of a favorable change in the MSR valuation of $280.4
million, partially offset by the reduction in net gains (losses) on the sale of securities of $171.1
million. In the first quarter of 2004, the Company elected not to sell higher yielding securities to
offset MSR impairment in the mortgage banking business segment. Excluding the impact of the
change in MSR and net gains (losses) on the sale of securities, Consumer Banking’s contribution
for the current quarter rose by 11.7 percent over the first quarter of 2004. The increase was
primarily due to an increase in total net revenue, excluding net gains (losses) on the sale of
securities (5.0 percent), and a reduction in the provision for credit losses (12.8 percent).
Offsetting these favorable variances were higher noninterest expense, excluding the change in
MSR valuation (2.2 percent). The growth in noninterest income, excluding net gains (losses) on
the sale of securities, quarter-over-quarter was driven by deposit service charges, commercial
products revenue, mortgage banking revenue, investment products fees and commissions and other
revenue. The unfavorable variance in noninterest expense, excluding the change in MSR
valuation, quarter-over-quarter was primarily the result of higher net shared services expense and
other expense.
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23. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 23
Private Client, Trust and Asset Management provides trust, private banking, financial
advisory, investment management and mutual fund and alternative investment product services
through five businesses: Private Client Group, Corporate Trust, Asset Management, Institutional
Trust, and Custody and Fund Services, LLC. Private Client, Trust and Asset Management
contributed $109.0 million of the Company’s operating earnings in the second quarter of 2004,
11.8 percent higher than the same period of 2003 and .9 percent lower than the first quarter of
2004. The favorable variance in the business line’s contribution in the second quarter of 2004 over
the second quarter of 2003 was the result of favorable variances in total net revenue (7.6 percent)
and total noninterest expense (.7 percent), partially offset by a $7.3 million increase in the
provision for credit losses. Higher average loans outstanding (3.4 percent) and total deposits (34.0
percent) favorably impacted net interest income year-over-year, while noninterest income benefited
from higher trust and investment management fees due to improving equity market valuations and
net new account growth. The slight decrease in the business line’s contribution (.9 percent) in the
second quarter of 2004 from the first quarter of 2004 was the result of higher total net revenue (2.7
percent), offset by higher total noninterest expense (1.6 percent) and a $7.9 million increase in the
provision for credit losses, the result of higher net charge-offs in the second quarter of 2004. The
increase in net interest income from the first quarter of 2004 to the second quarter of 2004 was
primarily driven by an increase in average loans outstanding (2.2 percent) and total deposits (3.1
percent), while noninterest income benefited from tax preparation fees and net new account
growth.
Payment Services includes consumer and business credit cards, corporate and purchasing
card services, consumer lines of credit, ATM processing, merchant processing, and debit cards.
Payment Services contributed $176.8 million of the Company’s operating earnings in the second
quarter of 2004, a 23.3 percent increase over the same period of 2003, and a 9.9 percent increase
over the first quarter of 2004. The increase in Payment Services’ contribution in the second
quarter of 2004 from the same period of 2003 was the result of higher total net revenue (10.0
percent) and a lower provision for credit losses (9.6 percent), partially offset by an increase in total
noninterest expense (5.8 percent). The increase in total net revenue year-over-year was primarily
due to growth in noninterest income (14.4 percent), partially offset by lower net interest income
(2.3 percent), which primarily reflected higher corporate card rebates and a reduction in late fees
relative to the prior year’s quarter. The increase in noninterest income was principally the result of
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24. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 24
growth in credit and debit card revenue (11.5 percent), corporate payment products revenue (13.0
percent), ATM processing service revenue (10.6 percent) and merchant processing services
revenue (16.4 percent). Although credit and debit card revenue was negatively impacted in the
second quarter of 2004 by the VISA debit card settlement and higher customer loyalty rewards
expense, increases in transaction volumes and other rate adjustments more than offset these
detrimental changes. The growth in total noninterest expense year-over-year primarily reflected an
increase in processing expense related to the revenue growth. The increase in Payment Services’
contribution in the second quarter of 2004 over the first quarter of 2004 was primarily due to
seasonally strong total net revenue (8.1 percent), offset by a slight increase in the provision for
credit losses (2.4 percent) and an increase in total noninterest expense (8.5 percent), the result of
the increase in processing related expense.
Treasury and Corporate Support includes the Company’s investment portfolios, funding,
capital management and asset securitization activities, interest rate risk management, the net effect
of transfer pricing related to average balances and the residual aggregate of expenses associated
with business activities managed on a corporate basis, including enterprise-wide operations and
administrative support functions. Operational expenses incurred by Treasury and Corporate
Support on behalf of the other business lines are allocated back primarily based on customer
transaction volume and account activities to the appropriate business unit and are identified as net
shared services expense. Treasury and Corporate Support recorded operating earnings of $90.9
million in the second quarter of 2004, compared with operating earnings of $137.6 million in the
second quarter of 2003 and $203.8 million in the first quarter of 2004. The decrease in operating
earnings in the current quarter from the second quarter of 2003 was largely due to lower total net
revenue (6.5 percent) and higher total noninterest expense (45.8 percent). Lower net revenue
reflected the Company’s asset/liability management decisions to invest in lower-yield floating-rate
securities, higher-cost fixed funding and repositioning of the balance sheet for changes in the
interest rate environment. The increase in total noninterest expense year-over-year reflected higher
performance and stock-based compensation costs during 2004. The unfavorable variance in
operating earnings in the second quarter of 2004 from the first quarter of 2004 was principally the
net result of a $90.0 million credit in income tax expense and a $35.4 million charge associated
with the prepayment of debt, both of which were recorded in the first quarter of 2004. In addition,
total net revenue declined 8.1 percent quarter-over-quarter, primarily due to the reduction in the
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25. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 25
investment securities portfolio and continuing asset/liability management decisions of the
Company.
Additional schedules containing more detailed information about the Company’s business line
results are available on the web at usbank.com or by calling Investor Relations at 612-303-0781.
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, JERRY A.
GRUNDHOFER, AND VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER, DAVID
M. MOFFETT, WILL HOST A CONFERENCE CALL TO REVIEW THE FINANCIAL
RESULTS ON TUESDAY, July 20, 2004, AT 1:00 p.m. (CDT). To access the conference call,
please dial 800-540-0559 and ask for the U.S. Bancorp earnings conference call. Participants
calling from outside the United States, please call 785-832-1508. For those unable to participate
during the live call, a recording of the call will be available approximately one hour after the
conference call ends on Tuesday, July 20, 2004, and will run through Tuesday, July 27, 2004, at
11:00 p.m. (CDT). To access the recorded message dial 888-567-0677. If calling from outside the
United States, please dial 402-530-0419. After July 27th, a recording of the call will continue to be
available by webcast on the U.S. Bancorp web site at usbank.com.
Minneapolis-based U.S. Bancorp (“USB”), with $190 billion in assets, is the 6th largest
financial services holding company in the United States. The company operates 2,315 banking
offices and 4,565 ATMs, and provides a comprehensive line of banking, brokerage, insurance,
investment, mortgage, trust and payment services products to consumers, businesses and
institutions. U.S. Bancorp is the parent company of U.S. Bank. Visit U.S. Bancorp on the web at
usbank.com.
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26. U.S. Bancorp Reports Second Quarter 2004 Results
July 20, 2004
Page 26
Forward-Looking Statements
This press release contains forward-looking statements. Statements that are not historical
or current facts, including statements about beliefs and expectations, are forward-looking
statements. These statements often include the words “may,” “could,” “would,” “should,”
“believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “potentially,”
“probably,” “projects,” “outlook” or similar expressions. These forward-looking statements cover,
among other things, anticipated future revenue and expenses, and the future prospects of the
Company. Forward-looking statements involve inherent risks and uncertainties, and important
factors could cause actual results to differ materially from those anticipated, including the
following, in addition to those contained in the Company's reports on file with the SEC: (i) general
economic or industry conditions could be less favorable than expected, resulting in a deterioration
in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-
based products and services; (ii) changes in the domestic interest rate environment could reduce
net interest income and could increase credit losses; (iii) inflation, changes in securities market
conditions and monetary fluctuations could adversely affect the value or credit quality of the
Company's assets, or the availability and terms of funding necessary to meet the Company's
liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial
services companies could alter the Company's business environment or affect operations; (v) the
potential need to adapt to industry changes in information technology systems, on which the
Company is highly dependent, could present operational issues or require significant capital
spending; (vi) competitive pressures could intensify and affect the Company's profitability,
including as a result of continued industry consolidation, the increased availability of financial
services from non-banks, technological developments, or bank regulatory reform; (vii) changes in
consumer spending and savings habits could adversely affect the Company’s results of operations;
(viii) changes in the financial performance and condition of the Company’s borrowers could
negatively affect repayment of such borrowers’ loans; (ix) acquisitions may not produce revenue
enhancements or cost savings at levels or within time frames originally anticipated, or may result
in unforeseen integration difficulties; (x) capital investments in the Company's businesses may not
produce expected growth in earnings anticipated at the time of the expenditure; and (xi) acts or
threats of terrorism, and/or political and military actions taken by the U.S. or other governments in
response to acts or threats of terrorism or otherwise could adversely affect general economic or
industry conditions. Forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update them in light of new information or future events.
###
(MORE)
27. U.S. Bancorp
Consolidated Statement of Income
Three Months Ended Six Months Ended
(Dollars and Shares in Millions, Except Per Share Data) June 30, June 30,
(Unaudited) 2004 2003 2004 2003
Interest Income
Loans $1,740.0 $1,821.0 $3,487.0 $3,657.7
Loans held for sale 27.3 51.8 47.2 111.4
Investment securities
Taxable 438.7 422.4 902.7 818.5
Non-taxable 4.7 7.5 10.0 16.4
Other interest income 25.5 25.1 47.4 55.0
Total interest income 2,236.2 2,327.8 4,494.3 4,659.0
Interest Expense
Deposits 205.3 288.5 432.3 595.1
Short-term borrowings 58.9 38.9 108.8 78.4
Long-term debt 174.8 184.0 360.7 368.3
Junior subordinated debentures 24.8 24.5 48.3 55.9
Total interest expense 463.8 535.9 950.1 1,097.7
Net interest income 1,772.4 1,791.9 3,544.2 3,561.3
Provision for credit losses 204.5 323.0 439.5 658.0
Net interest income after provision for credit losses 1,567.9 1,468.9 3,104.7 2,903.3
Noninterest Income
Credit and debit card revenue 158.8 142.3 300.6 269.7
Corporate payment products revenue 102.7 90.9 197.5 176.9
ATM processing services 44.9 41.9 87.1 84.3
Merchant processing services 165.1 141.8 306.2 269.1
Trust and investment management fees 251.7 238.9 500.3 467.5
Deposit service charges 202.1 179.0 387.3 342.2
Treasury management fees 121.5 111.8 239.0 223.8
Commercial products revenue 107.4 100.0 217.8 204.2
Mortgage banking revenue 109.9 90.3 204.1 185.7
Investment products fees and commissions 42.2 38.1 81.5 73.2
Securities gains (losses), net (171.7) 213.1 (171.7) 353.8
Other 107.1 84.8 210.3 188.6
Total noninterest income 1,241.7 1,472.9 2,560.0 2,839.0
Noninterest Expense
Compensation 572.6 547.6 1,108.4 1,093.6
Employee benefits 91.2 79.6 191.4 171.3
Net occupancy and equipment 153.4 159.5 309.1 320.8
Professional services 34.7 32.9 67.1 59.3
Marketing and business development 48.7 51.1 84.0 80.9
Technology and communications 102.4 104.1 204.1 209.0
Postage, printing and supplies 60.5 61.8 122.1 122.2
Other intangibles (47.6) 312.3 178.5 547.4
Merger and restructuring-related charges -- 10.8 -- 28.4
Other 216.7 186.9 422.8 368.3
Total noninterest expense 1,232.6 1,546.6 2,687.5 3,001.2
Income from continuing operations before income taxes 1,577.0 1,395.2 2,977.2 2,741.1
Applicable income taxes 540.1 480.2 931.9 942.0
Income from continuing operations 1,036.9 915.0 2,045.3 1,799.1
Income from discontinued operations (after-tax) -- 4.9 -- 5.6
Net income $1,036.9 $919.9 $2,045.3 $1,804.7
Earnings Per Share
Income from continuing operations $.55 $.48 $1.07 $.94
Discontinued operations -- -- -- --
Net income $.55 $.48 $1.07 $.94
Diluted Earnings Per Share
Income from continuing operations $.54 $.47 $1.06 $.93
Discontinued operations -- .01 -- .01
Net income $.54 $.48 $1.06 $.94
Dividends declared per share $.240 $.205 $.480 $.410
Average common shares outstanding 1,891.6 1,922.3 1,903.5 1,920.6
Average diluted common shares outstanding 1,913.4 1,931.6 1,927.3 1,928.6
Page 27
28. U.S. Bancorp
Consolidated Ending Balance Sheet
June 30, December 31, June 30,
(Dollars in Millions) 2004 2003 2003
Assets (Unaudited) (Unaudited)
Cash and due from banks $7,476 $8,630 $11,795
Investment securities
Held-to-maturity 125 152 188
Available-for-sale 40,160 43,182 35,390
Loans held for sale 1,383 1,433 3,791
Loans
Commercial 40,065 38,526 42,238
Commercial real estate 27,204 27,242 27,259
Residential mortgages 14,380 13,457 11,712
Retail 41,181 39,010 38,214
Total loans 122,830 118,235 119,423
Less allowance for loan losses (2,244) (2,369) (2,368)
Net loans 120,586 115,866 117,055
Premises and equipment 1,893 1,957 2,064
Customers' liability on acceptances 169 121 148
Goodwill 6,226 6,025 6,329
Other intangible assets 2,475 2,124 1,984
Other assets 9,737 9,796 16,155
Total assets $190,230 $189,286 $194,899
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing $32,786 $32,470 $44,465
Interest-bearing 71,314 74,749 72,315
Time deposits greater than $100,000 15,827 11,833 9,547
Total deposits 119,927 119,052 126,327
Short-term borrowings 11,592 10,850 7,387
Long-term debt 31,013 31,215 31,379
Junior subordinated debentures 2,652 2,601 2,652
Acceptances outstanding 169 121 148
Other liabilities 6,202 6,205 7,485
Total liabilities 171,555 170,044 175,378
Shareholders' equity
Common stock 20 20 20
Capital surplus 5,860 5,851 5,836
Retained earnings 15,644 14,508 14,121
Less treasury stock (2,316) (1,205) (1,092)
Other comprehensive income (533) 68 636
Total shareholders' equity 18,675 19,242 19,521
Total liabilities and shareholders' equity $190,230 $189,286 $194,899
Page 28
30. U.S. Bancorp
Income Statement Highlights
Financial Results and Ratios on an Operating Basis
(Excluding Merger and Restructuring-Related Items and Discontinued Operations)
Three Months Ended Percent Change v. June 30, 2004
(Dollars and Shares in Millions, Except Per Share Data) June 30, March 31, June 30, March 31, June 30,
(Unaudited) 2004 2004 2003 2004 2003
Net interest income (taxable-equivalent basis) $1,779.4 $1,779.0 $1,798.6 -- % (1.1) %
Noninterest income 1,241.7 1,318.3 1,472.9 (5.8) (15.7)
Total net revenue 3,021.1 3,097.3 3,271.5 (2.5) (7.7)
Noninterest expense 1,232.6 1,454.9 1,535.8 (15.3) (19.7)
Operating earnings before provision and income taxes 1,788.5 1,642.4 1,735.7 8.9 3.0
Provision for credit losses 204.5 235.0 323.0 (13.0) (36.7)
Operating earnings before income taxes 1,584.0 1,407.4 1,412.7 12.5 12.1
Taxable-equivalent adjustment 7.0 7.2 6.7 (2.8) 4.5
Applicable income taxes 540.1 391.8 483.8 37.9 11.6
Operating earnings 1,036.9 1,008.4 922.2 2.8 12.4
Merger and restructuring-related items (after-tax) -- -- (7.2) -- *
Discontinued operations (after-tax) -- -- 4.9 -- *
Net income in accordance with GAAP $1,036.9 $1,008.4 $919.9 2.8 12.7
Diluted Earnings Per Share
Operating earnings $.54 $.52 $.48 3.8 12.5
Net income .54 .52 .48 3.8 12.5
Financial Ratios on an Operating Basis
Net interest margin** 4.28 % 4.29 % 4.52 %
Interest yield on average loans** 5.79 5.93 6.21
Rate paid on interest-bearing liabilities 1.38 1.45 1.68
Return on average assets 2.19 2.14 1.98
Return on average equity 21.9 20.7 19.0
Efficiency ratio*** 38.6 47.0 50.2
Tangible efficiency ratio**** 40.1 39.7 40.0
* Not meaningful
** On a taxable-equivalent basis
*** Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income
excluding securities gains (losses), net
**** Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income
excluding securities gains (losses), net and intangible amortization
Page 30
31. U.S. Bancorp
Income Statement Highlights
Financial Results and Ratios on an Operating Basis
(Excluding Merger and Restructuring-Related Items and Discontinued Operations)
Six Months Ended
(Dollars and Shares in Millions, Except Per Share Data) June 30, June 30, Percent
(Unaudited) 2004 2003 Change
Net interest income (taxable-equivalent basis) $3,558.4 $3,575.3 (.5) %
Noninterest income 2,560.0 2,839.0 (9.8)
Total net revenue 6,118.4 6,414.3 (4.6)
Noninterest expense 2,687.5 2,972.8 (9.6)
Operating earnings before provision and income taxes 3,430.9 3,441.5 (.3)
Provision for credit losses 439.5 658.0 (33.2)
Operating earnings before income taxes 2,991.4 2,783.5 7.5
Taxable-equivalent adjustment 14.2 14.0 1.4
Applicable income taxes 931.9 951.7 (2.1)
Operating earnings 2,045.3 1,817.8 12.5
Merger and restructuring-related items (after-tax) -- (18.7) *
Discontinued operations (after-tax) -- 5.6 *
Net income in accordance with GAAP $2,045.3 $1,804.7 13.3
Diluted Earnings Per Share
Operating earnings $1.06 $.94 12.8
Net income 1.06 .94 12.8
Financial Ratios on an Operating Basis
Net interest margin** 4.28 % 4.56 %
Interest yield on average loans** 5.86 6.31
Rate paid on interest-bearing liabilities 1.42 1.75
Return on average assets 2.16 1.98
Return on average equity 21.3 19.2
Efficiency ratio*** 42.7 49.1
Tangible efficiency ratio**** 39.9 40.0
* Not meaningful
** On a taxable-equivalent basis
*** Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income
excluding securities gains (losses), net
**** Computed as noninterest expense divided by the sum of net interest income on a taxable-equivalent basis and noninterest income
excluding securities gains (losses), net and intangible amortization
Page 31